Not a good start this morning, after the serious selling yesterday in the bond and stock markets this morning the 10 yr note climbed to 2.43%, up another eight basis points frm yesterday’s increase of 17 bps. Yesterday 30 yr the 3.5 July FNMA coupon price fell 121 bp and GNMA 3.5 fell 177 basis points; the DJIA dropped 206 points. At 9:00 this morning the 10 yr traded at 2.42%, 30 yr MBS price down 57 basis points frm yesterday’s close, the DJIA futures point to an opening down 100 points. Gold crashing, down about $80.00, all global stock markets taking heavy hits.
My mother used to say, ‘be careful of what you want, you may get it’; going into the FOMC meeting yesterday and then Bernanke’s press conference markets were clamoring for more clarity from the Fed. For the past six weeks the one constant drum beat within the markets focused on what will the Fed do? Markets wanted clarity. Be careful of what you want, it may not be what you expected; yesterday markets got clarity like a pie in the face and what it markets got wasn’t what was expected….clarity frm Bernanke.
Bernanke in his press conference for the first time put details out there about what the Fed will do and when it will do it. Bernanke told the world that the Fed believes the economic outlook is improving and based on the Fed’s forecasts of continued slow improvement (if it continues) the Fed will begin tapering its easing by the end of this year and by mid-2014 all the easing’s will be ended. Shock an Awe panicked markets, interest rates exploded and the US and world stock markets fell like stones. Up until yesterday Fed officials were want to be specific, even Bernanke in his Congressional testimonies recently was reluctant to put specifics out there. Based on the reactions in all markets yesterday so far this morning, markets were not expecting specifics, just more obtuse rhetoric that the Fed is famous for.
One thing to keep in mind, Bernanke cautioned that the Fed’s tapering and ending its market support is based on what the Fed believes now, that the economy will continue to improve. If the Fed is wrong, and their track record isn’t much better than all the private estimates, Bernanke made it clear the Fed will keep on with its purchasing of MBSs and treasuries. Economic data, always significant, will have added importance now given the definitive comments frm him yesterday. One thing that is important, Bernanke said the Fed would not sell its MBS securities it holds, a relief because there were increasing concerns the Fed would sell MBSs eventually and add ore increase to mortgage rates.
At 8:30 this morning weekly jobless claims were expected to be up 6, as reported claims increased 18K to 354K. The four-week moving average, a less-volatile measure than the weekly figures, climbed to 348,250 last week from 345,750.
At 9:30 the DJIA opened -100, NASDAQ -36, S&P -15; the 10 yr at 2.41% +6 bp and 30 yr MBS price -57 bps in price from yesterday’s close. (see below for 10:00 levels).
Three key reports at 10:00. May existing home sales expected up 0.5%; sales increased 4.0%, the median sales price $208K, yr/yr sales up 12.9%, the median price up 15.4% yr/yr. The number of days to sell a home down to 39 days compared to 72 days a year ago. May leading economic indicators reported up 0.1% against estimates of +0.2%. The June Philly Fed business index really improved, expected at +1.0 frm -5.2 on the index in May the index increased to 12.5 the best index reading since April 2011; all the interior components were also much stronger than was expected. Even the better data at 10:00 didn’t generate much positive response initially.
China appears to be tightening credit by draining reserves to stop predatory lending in the country. China’s seven-day repurchase rate, which measures interbank funding availability, rose 270 basis points, or 2.7 percentage points, to 10.77%. The one-day rate rose by an unprecedented 527 basis points to an all-time high of 12.85%. Also China’s manufacturing is shrinking at a faster pace this month; a preliminary reading of 48.3 for the Chinese Purchasing Managers’ Index (EC11FLAS) released today by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate. The importance of China’s economy is another reason US stocks are under pressure.
The same story; the bond and mortgage markets remain technically bearish as we have noted since the beginning of May. Take all the debate and outlooks frm pundits, analysts, and economists, wad them into a huge ball and toss them in the basket. All you need to focus on is what the markets themselves are doing and right now markets are in turmoil and declining. Doing that will always keep you in line with the markets regardless of what is written or said even by the Federal Reserve. Our forecasts were that the 10 yr would find some support at 2.40%, this morning the note hit 2.47%, it is still in play at 2.40% on a closing basis. That said, estimates as to how high before a rebound are not as reliable as we would like in our analysis. Look for more volatility through the rest of the day. The bond and mortgage markets, as well as the stock market still reacting to the Fed surprise yesterday, a lot of emotional tension today.